The Impact of Reputation on Stock Market Value

This article reports on an evidence based method for determining the impact of corporate reputations on equity market values. Combining financial and operating performance data for 410 leading US and UK companies with perceived reputation rankings obtained from public sources, Reputation Dividend have analysed a system of determining the average contribution of reputation to market value. As of January 1st 2012 corporate reputations accounted for close to 26% of the total market capitalization of the S&P500, or US$3,190bn of shareholder value. In the UK, reputations were delivering US$770bn of value across the FTSE100 and US$67bn across the FTSE250. This is a useful tool for institutional investors and managers.

1.Introduction

Corporate reputations rank amongst
the most familiar but least understood of a firm’s assets. No survey research
based metrics offer any real insight into how valuable they actually are or
indeed, what can be done to secure and build the value they represent. Black
and Carnes (2000) argued that corporate reputations contribute to a firm’s
value but they did not identify “a method for evaluating and measuring, in
dollar terms, an individual firm’s reputation”. This paper addresses that shortcoming
and offers a guide for investors and corporations.

The need to measure the impact of
reputation on market value has become increasingly urgent. By the start of 2012
the tangible book or net asset value of companies in the S&P500 accounted
for only around 49% of market capitalisation; 55% in the FTSE100. Earnings
expectations and other financials helped account for some of the shortfall but the
bulk is a function of intangibles, identifiable and unidentifiable. This creates
a variety of problems. First, it reduces the veracity of investors’ valuation
calculations. Second, it limits their ability to take a suitably measured
account of reputa...